焦點對談 — 透過ETF投資於歐洲國防業

Talking Heads podcast with George Ferguson

Andrew Craig: Hello and welcome to this week’s BNP Paribas Asset Management Talking Heads podcast. Every week,  Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing investing in European defence companies that are focused on developing new technologies to keep pace with advancements and the changing threats and in particular a passive investment approach in the European defence sector via a customised benchmark constructed and administered by Bloomberg Intelligence. I’m Andy Craig, Co-Head of the Investment Insight Centre, and I’m joined today by George Ferguson, who is Senior Analyst for Aerospace, Defence and Airlines at Bloomberg Intelligence, the research group at Bloomberg LP. Welcome, George, and thank you for joining us today.

Geroge Ferguson: Thank you for having me.

AC: Let’s start by discussing the basic case for investing in the European defence sector. Can you talk us through the rationale?

GF: With the United States focusing more on Asia and the new Trump administration telling European countries they may not be willing or able to come to the defence of Europe in time of need, it looks like Europe has to carve its own defence strategy and can’t count on the US as a part of NATO to come to Europe’s defence. In that environment, we think European spending has to go up significantly and persistently. The United States spends about a trillion dollars on defence. NATO is somewhere around half a trillion dollars now. We think that spend probably needs to come up – $300 billion or more depending on what the European nations want to do. There’s a lot of capabilities that Europe has really left to the United States that need to be reinvigorated. Initially, that capabilities gap becomes something that’s very focused on ground forces and air defence. In time, I could see it stretch in naval. That 2-300 billion annually is probably conservative to be a deterrent inside Europe.

AC: We’ve seen since the start of this year major commitments by European governments to strengthening an independent defence capability. In particular, we’ve seen the new German coalition government making a major long-term commitment. This is a significant change to the previous policy. Of course, that has led valuations of shares in European defence companies to rally strongly as investors anticipate the governments will spend more on shouldering the burden for Europe’s security. Do you see it as a long-term theme or do you see risks that it is something which peters out?

GF: Valuations have risen pretty dramatically for a lot of the European defence names. What we’re really seeing is governments putting a lot of contracts down. There’s a lot of backlogs for these defence manufacturers to start working on. It’s going to take them time to turn those contracts into revenues because they have to build the productive capacity. Then we’ll see the revenue rise and that will help out some of the valuations. But to rebuild the capabilities that Europe needs to effectively deter any aggression inside the continent, it’s going to have to continually spend this money, not for the next five years. So we see it really as a very long-term trend.

AC: Listening to you, it strikes me that we’re starting from a very low base. Europe has cashed in the peace dividend post the Cold War. And we have once again to build up a capability for Europe to have its own defence capability. You’ve talked about it being a broad-based move in terms of what has to happen. Can you explain the customised benchmark, the Bloomberg Europe Defence Select index, which you’ve constructed for our passive approach to the European defence sector? How does it provide investors with exposure to the sectors that are likely to matter in the future?

GF: There’s always a decent amount of aerospace inside a number of those defence names and we’ll probably see those defence businesses grow and become much more significant portions of those companies. There are some pureplay defence names as well, but we’ve also constructed the index, so it goes in and find some of those other supporting industries for the defence industry. It’ll get some of the capital goods exposures. It’ll find some of the semiconductor exposures because as you build out again this sort of defence capability, it isn’t just about pressing metal. You’ll need semiconductors and technology for things like radars.

AC: George, we talked about the rationale behind the investment case for investing in the European defence sector. What would you see as Europe builds and strengthens its defence capabilities [as] potential milestones or important developments that investors should be looking out for?

GF: What we’re going to see initially is a lot of orders and as those orders are converted into revenue and follow-on orders occur, I would call that a good confirmation of the trend. So, we should see revenues rising at most of these defence-oriented names. We’re going to want to see more collaboration in the European militaries where they built common infrastructure structure for how they would lead those forces in the field. As the European defence industry builds out, we’ll also look for some smaller companies, perhaps tech companies, to grow up into larger companies and become perhaps full-blown what we call a defence prime that can build a complete system.

AC: Can I ask you to explain to us what is a defence prime?

GF: We think of a defence prime as a manufacturer that coordinates the build of a complete system. It’s like a ship: one manufacturer is not going to build all the componentry. You’ll give that contract to the prime and the prime will go out and buy the propulsion systems for the ship. It’ll buy the cannons for the ship. The prime puts the whole thing together and delivers the final product to the end-user.

AC: Well, a lot more vocabulary for Europeans to become familiar with as this process develops. It’s clearly going to be a long-term project and represents potential for investors via the passive investment approach that we’re proposing using the benchmark that you constructed and will be administering for us. Thank you very much, George, for joining us today.

GF: Enjoyed it, thank you.

AC: That’s it for this week’s episode of Talking Heads. If you’d like to learn more about our investment insights or about our passive investment approach to investing in European defence stocks, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas.hyphen.am.com. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Andy Craig, and George Ferguson, Senior Analyst for Aerospace, Defence and Airlines at Bloomberg Intelligence. Please do join us again next week. Until then, take care.